One of the most important concerns for real estate investors is to have is cash on hand. After buying a house, an investor needs money left over to make the repairs on the house. Yet, with mortgage companies almost universally requiring 20% cash down, how do you cut your costs when purchasing an investment property. The secret is, when making a purchase offer, to include language to reduce closing costs in a way that benefits both the buyer and the seller.
Here’s how it works. I recently bought an investment property for $105,000. Since I knew it was a buyers market with many more sellers than buyers, and I needed cash on hand after closing to make repairs, I asked the buyer to pay for 2% of the non-recurring closing costs.
Use The Right Language in Your Offer
When I made the offer to I included the language “seller shall contribute 2% of sales price to buyer’s non-recurring closing cost.” Two percent is the maximum a seller is allowed to contribute. This amounted to a $2,100 savings in closing costs for me. Instead of paying $4,527 at closing, I paid only $2,427.
Make it Easy for the Seller to Agree
The good part for the seller is it’s relatively easy for them to cooperate on this type of arrangement. They don’t have to show up at closing with a check, so it’s not money that comes directly out of their pocket. They pay the 2% by receiving a slightly smaller check for their house. In this case, they receive a check for $102,900 instead of the selling price of $105,000.
A Fast Nickel is Better Than a Slow Dime for Sellers
Was it worth it for the seller to receive less? Wouldn’t it have been better for them to hold out for the entire $105,000? No, because it allowed them to sell the house faster than they otherwise might have. If they have a live buyer with money in his hands, are they better off waiting to see if someone else comes along with a slightly better deal? Not in this buyers market. They might find themselves waiting a long time.
Do what I do. The less cash you have to come up with for closing costs the more cash you have to make repairs and other carrying costs. Include the closing cost share language in your purchase offer to sellers and you have established a true win-win situation.